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Jury still out on stimulus package
A stimulus package has been underway for half a year to combat the economic slowdown. How has it worked?
At the monthly press conference in Hanoi last week, Government Office chairman and Minister Nguyen Xuan Phuc announced that the government’s stimulus package had shown its effectiveness.
Industrial production growing 3.3 per cent in the first four months of the year against a year earlier, total retail turnover increasing 21.5 per cent and credit expanding 11.2 per cent were evidence of the effectiveness, he said. Phuc was referring to the government’s fiscal package adopted since November 2008 to prevent the economy from a further slowdown.
Despite being hit hard by the global financial crisis, Vietnam still reported a growth rate of 3.1 per cent in the first quarter of 2009, also one of a few economies displaying a positive growth. Still, it was much lower than the 7.4 per cent rate achieved in the corresponding period last year. Prime Minister Nguyen Tan Dung, in an investment conference in Hong Kong last month, said Vietnam’s stimulus package was up to $8 billion, about 12 per cent of 2008’s gross domestic product (GDP).
The stimulus package has been welcomed by struggling enterprises and many economists said it was the proper move to boost production and stimulate domestic demand. As part of the package, the government has funnelled $1 billion to subsidise 4 per cent of lending interest rates for loans of up to eight months. In addition, the government has announced credit guarantees for export activities and the purchase of machinery and equipment that serve agricultural production.
According to a Ministry of Planning and Investment (MPI) report, some VND255 trillion ($14.3 billion) has been borrowed from commercial banks with the interest rate subsidy through April 23.
Phuc said the disbursement proved enterprises were expanding production and business activities, adding that could be a sign of an economic recovery.
The government’s stimulus measures also include tax slashes and it is planning to mobilise more than VND60 trillion ($3.37 billion) through government bond issuance to invest into infrastructure projects.
Time is money
Analysts, however, have claimed that the government’s stimulus measures could be even more effective if their implementation was accelerated. ollowing Decision 30/2008/NQ-CP on December 11, the prime minister urged all local authorities to apply the stimulus measures as soon as possible.
But the MPI report showed that the stimulus measures were implemented too slowly in state budget and government bond-funded infrastructure projects.
The report said the disbursement of investment projects funded by the state budget was failing to meet requirements. A similar situation also appeared in projects funded by government bonds.
Nguyen Duc Hong, head of the Ministry of Finance’s Investment Department, said the slow disbursement of projects had been an insolvable issue for years. “I don’t see any improvement in the issue this year,” he said.
Hong said he was worried the government would not be able to disburse the $3.3 billion raised from government bonds this year because of complicated administrative procedures and contractors and local officers lacking ability.
“Many provinces are confused about using investment capital from government bonds due to complicated administrative procedures,” said the MPI report.
Le Dinh An, director of the the MPI’s National Centre for Socio-Economic Information and Forecast, said the slow disbursement and complicated administrative procedures would hinder the effectiveness of the government’s stimulus packages.
“We are stimulating the economy so time is key. We may get nothing from a stimulus package if it is implemented too slowly,” said Asian Commercial Bank chairman and former MPI minister Tran Xuan Gia. He also warned that slow implementation could be dangerous to the economy, especially during the economic recovery.
Other risks
Pointing to the subsidised loans’ terms, Bui Kien Thanh, chief executive officer of the International Investment and Asset Management Corporation, said the duration was too short. “It is very hard for enterprises to manufacture and sell products and then refund to banks within eight months or even 24 months,” Thanh said. This kept many enterprises from taking out subsidised loans, he said.
A report from the MPI’s National Centre for Socio-Economic Information and Forecast also showed problems in undertaking the government policies aimed at preventing rising unemployment. In the first quarter of this year, the government announced it would provide 12-month, interest-free loans for enterprises which have had to cut 30 per cent or more of their labour force, to pay redundant workers.
According to the report, about 100 enterprises applied for the loans to pay for redundant workers through the end of March 2009. However, no enterprise actually received the stipulated loans. Lai Van Dao, deputy director of Vietnam Development Bank, which is in charge of providing the loans, said no enterprises had received loans because of stringent requirements.
“The government regulations only allow loans for enterprise that completely paid worker salaries and social insurance. No enterprises met those requirements,” Dao said. Le Dinh An even went further by warning that the requirements could encourage enterprises to cut 30 per cent of jobs in order to get the loan.
“If enterprises do that, then unemployment could grow even more dire,” he said. Bui Kien Thanh said the biggest risk to the economy was a return of high inflation. He said with the government’s stimulus measures, a large amount of money had been pumped into circulation. Tran Xuan Gia shared the view.
“The stimulus package is essential right now, but the government has to control it. Vietnam experienced rampant inflation in 2008, when it reached 19.98 per cent, and nobody wants that the inflation to come back,” Gia said.
He said the growth of credit at 11.2 per cent during 2009’s first four months was alarming. “This growth is equivalent to the growth in 2007, one year before the booming of inflation in 2008,” he said. Furthermore, the government is also facing a large budget deficit of up to 8 per cent of GDP. Thanh said that meant the government had to be especially careful to use money effectively.
“Otherwise the government will waste a lot of money while facing huge debts borrowed from government bonds and other countries,” he said.
VietNamNet, VIR
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